Entering the UAE Market: Opportunities & Challenges

The UAE is one of the most investment friendly destinations in the world. The World Bank’s “Ease of Doing Business” report ranks UAE as No. 1 among Arab countries and 31 globally. The country’s visionary rulers foresaw the need to diversify its economy long back, and today, the UAE is one of the few brighter spots in the region despite the volatile oil price. This article summarizes some of the investment options available in the market, along with a few considerations on how to better make use of them.

Investment Options

One of the most preferred investment vehicles of foreign investors in the UAE is the limited liability company (LLC). The Department of Economic Development of each Emirate regulates an LLC and permits an LLC to engage in a variety of activities. It is important to note that a foreign investor can own only up to 49% shares in an LLC and a minimum of 51% shares must be owned by a UAE national or a company wholly owned by UAE nationals (UAE National). In reality, many of these LLCs are beneficially owned by foreign investors and the UAE national partners act as a ‘sleeping partner’. However, extreme care must be taken to ensure that the partnership is structured legally and their interests are adequately protected through proper agreements. One of the main reasons of partners’ disputes in an LLC seem to result from lack of proper documentation.

A branch office is another preferred option of foreign institutional investors. A branch office is considered as an ‘extended arm’ of the parent company and the latter will be responsible for all the liabilities of the branch (including any tax implications). There are certain restrictions in terms of its permitted activities too. Further, a branch is required to appoint a ‘local service agent’ (UAE National) whose role is to ‘facilitate’ the business without any interest in the ownership, profit or management.

The UAE laws also permit foreign investors to ‘test’ the market through representative offices. Such offices are permitted only to engage in marketing or promotion of its parent company’s products. It cannot enter into business transactions or record sales. Typically, this option is adopted by many investors before entering into the market in a full-fledged manner. A representative office is also required to appoint a ‘local service agent’.

Free Zones

The UAE has about 40 free zones. In an unprecedented move in the region, the UAE welcomed foreign investors to invest in the country without a local partner, in 1985, by establishing Jebel Ali Free Zone. This was an unprecedented success too, and billions of dollars’ worth foreign investment poured into the country in a variety of sectors. Today, we have a myriad of free zones offering world class infrastructure, that are home to many of the world’s best multi-national corporations, including Dubai International Financial Centre, Dubai Internet City, Dubai Airport Free Zone, Dubai Multi Commodities Centre, Dubai Healthcare City and Masdar.

The free zones offer many benefits including 100% foreign ownership, full repatriation of profits, tax exemption and easy set up. However, it is important to note that a free zone company is not legally permitted to do business in the main land, except through a local agent. Also, free zones may not be the right domicile for foreign investors whose primary target client is the government or its various arms.

Commercial Agency and Distribution

For various reasons, including unfamiliarity of the market, many multinational corporations prefer entering into the market indirectly – through commercial agents or distributors. This offers an easy entry since the agents will be familiar with the market and may already have an established network facilitating better sales. Nevertheless, many such investors engage with the local agents without understanding the difference between a ‘commercial agency’ and a ‘distribution arrangement’, and get into troubles. Though the concept is more or less similar, the protection enjoyed by a ‘commercial agent’ under the relevant law is incomparable with that of a ‘distributor’. Once a commercial agency agreement is signed and it’s registered with the Ministry of Economy, it is extremely difficult for a foreign principal to terminate the relationship. On the other hand, a ‘commercial agency’ offers certain benefits too to the foreign principal. Accordingly, the foreign principal must assess both the options and decide carefully as to what suits his business.

Conclusion

For a foreign investor, the ideal investment vehicle and domicile may vary depending upon a variety of factors, including, parent company structure, preferred local ownership structure, proposed activities, target markets and clients. The associated costs also may vary based upon the chosen option. It is important to carefully analyze all the options and choose the best one based on the above. Equally important is to obtain professional guidance on the legal implications since any lapses could prove costly.